Sigmundur Gunnlaugsson stepped down on Tuesday night hours after thousands of protesters gathered outside parliament to demand his resignation.

Agriculture Minister Sigurdur Ingi Johannsson - who will replace the prime minister for an interim period - confirmed to Icelandic broadcaster RUV that Gunnlaugsson was stepping down as leader of the country's coalition government.

Gunnlaugsson is the first major scalp from a leak of more than 11 million documents from Mossack Fonseca, a Panamanian law firm, showing tax-avoidance arrangements of the rich and famous around the world, Al Jazeera reported.

Gunnlaugsson was among the names mentioned in the so-called Panama Papers, which were published on Sunday.

The leaked documents allege that Gunnlaugsson and his wife set up a company called Wintris in the British Virgin Islands with the help of the Panamanian law firm.

Gunnlaugsson is accused of a conflict of interest for failing to disclose his involvement in the company, which held interests in failed Icelandic banks that his government was responsible for overseeing.